States face up to a fiscal reality that Washington won't

As the nation's governors gathered in Washington for their annual winter meeting, the states they lead are facing what one knowledgeable authority calls "a lost decade" of stagnant or declining revenues and budget crises.

Ray Scheppach, the man who used that phrase, has the credentials to call the situation "almost unprecedented." A veteran federal budgeteer, he has served as executive director of the National Governors Association for the last 27 years.

Just before the opening of this year's meeting, he told me that the most recent survey he'd conducted shows "the states have not bottomed out yet; they're continuing to deteriorate. This year will probably be the worst for state budgets, and with the jobless recovery we're having, we're looking at a lost decade" before anything like normalcy returns.

In a memo to his member-governors, Scheppach spelled it out: "The bottom line is that states will continue to struggle over the rest of this decade because of the combination of the length and depth of this economic downturn, the projected slow recovery, and the additional Medicaid responsibilities" slated for the states if health care legislation passed by the House and Senate should become law.

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In previous recessions, he said, lagging revenues meant that the worst budget years for states usually came two years after the recession formally ended. This time, the lag could be even longer, with several studies suggesting it may be 2014 or 2015 until revenues return to the level of 2008.

The governors' think tank, the Center for Best Practices, has drafted a 15-page report detailing how they can go about "redesigning state government for the new normal." During one of the closed sessions, Republican Mitch Daniels of Indiana and Democrat Jennifer Granholm of Michigan, both from Midwest states that have felt the brunt of the auto industry collapse, will lead a discussion of the steps that will be required.

Scheppach told me that the realization is beginning to spread, among governors and legislators, that this is no ordinary downturn and there will be no quick bounceback. Therefore, "the states will have to downsize permanently," he said.

The report also envisages big changes in the main areas of state spending. The era of prison-building and ever-stiffer sentences is ending, because, as Scheppach put it, aging inmates "are turning prisons into nursing homes." The cost of managing, safeguarding and caring for thousands of prisoners is forcing states to weigh other options for protecting against crime.

The budget squeeze is forcing previously off-limits changes in the other main state expenditures for elementary, secondary and higher education. Pressure is growing for consolidation of small elementary and high school districts, and for increasing the teaching loads of college faculties. Some states have begun measuring the percentage of undergraduates who actually receive degrees and rewarding the campuses that graduate most of the students they enroll.

When one considers the changes already under way in the states and the larger changes still to come, the Washington debate about balancing the budget through a bipartisan commission of uncertain membership seems almost academic.

As part of last year's stimulus package, states received $135 billion in borrowed federal money to avoid layoffs of teachers and cuts in health care. "Without it," Scheppach said, "we would have gone under." But the House-passed extension of another $25 billion in Medicaid relief has been in and out of the Senate jobs bill this year and its ultimate fate is uncertain. The states may be left to struggle on their own.

With both education standards in the 1980s and welfare reform in the 1990s, we have seen this pattern before: States act while Washington dithers and delays. Once again, the governors are facing up to a fiscal reality that many partisans in Washington prefer to ignore.